The Brexit Currency Guide

We took some time to sit down with Paul Plewman, Director and Head of Trading at CurrencyTransfer.com.

What is Brexit and who can vote?

If you’ve been living under a rock for the past few months, or have been the numbed to the origins by the relentless barrage of political debate, media comment and poll results, here’s a brief history of Brexit.

If we go back to before the General Election, in order to defend against the rising threat of anti EU sentiment (we could dumb this down and generalise to read ‘UKIP support’), Cameron promised that, if elected, he would hold an in/out referendum on EU membership.

The vote is open to all British, Irish and Commonwealth citizens who are over 18, live in the UK and are eligible to vote. It is also open to those Britons who have lived overseas for less than 15 years.

What are the polls saying?

Generally, the polls show a pretty close race. We’ve seen polls putting the ‘in’ camp ahead and we’ve seen the ‘out’ as much as 10% ahead. The latest phone pols show 45% for remain, 44% to leave and 11% undecided. The undecided voters could hold the key, especially if there is a Brexit equivalent of the ‘quiet Conservatives’, who were reluctant to tell pollsters their true views ahead of the General Election, making the polls much closer than the result.

Bremain camp

What is the main argument of the BREMAIN camp?

Trade – we access a huge free trade area within the EU, representing a massive freely addressable market, right on our doorstep.

The UK is economically stronger in Europe. Just yesterday, Yellen mentioned ‘Significant economic repercussions’ from a vote to leave. The UK would remain a key partner and core influence within the EU. It’s accepted that the EU is not perfect, but it will be easier to influence and improve from the inside.

Free movement of labour is a good thing. Whilst a lot has been made about migrant labour taking British jobs, there’s an argument that suggests that if someone without many contacts, much money, or English as their first language can arrive in the UK and steals your job, you’re probably not very good at your job!

A vote to leave could be the death-knell for Europe. If the UK were to leave, then how long before Greece demands a referendum, or Spain, or Italy? The hangover from the credit-crunch is still affecting much of the global economy and we’d be well served not to contribute to another economic shock.

Brexit camp

What is the main argument of the LEAVE camp?

We were promised reform, but Cameron’s whistle-stop tour of European Leaders before the referendum date was set achieved little.

Eurozone is unstable – Greece is all but bankrupt, Spain has huge unemployment, Italy and France aren’t pushing for any reforms and the ECB’s efforts have had limited effects.

Trade deals are there for the taking – six of the top ten economies are not in the EU and sit outside the free trade agreement. Norway / Switzerland prosper on the outside (Switzerland has individual trade deals that aggregate a far greater total market size than the EU has secured looking out).

Brexit effect on import export

What could be the Brexit impact for importers and exporters, or companies that do any business abroad?

The most obvious and immediate consideration here stems from the currency traction. We have been seen a materially weaker Pound whilst the referendum has been in the mind of the market. Get past the event risk with the Remain camp victorious and ‘normal’ market conditions should resume. Sterling will strengthen and we could see levels return to $1.50+ and EUR1.40+.

We’ve heard the Pound could plunge to it’s lowest levels in the 21st century in the event of Brexit. How do these events affect exchange rates?

The referendum represents a massive ‘event risk’ in the market. As a general rule, markets don’t like uncertainty and the big risk is that an ‘out’ vote will push the UK into a realm of economic uncertainty. For Sterling, the paradigm shift kicked off back in December when the Fed raised interest rates – this was the last time Cable has been over $1.50. The next real kick came in Feb, when Cable sold off down to $1.38 and since then we have been in volatile, sentiment driven, market conditions, where positive news from the ‘in’ camp has seen Sterling strengthen and conversely, when the ‘out’ camp has edged ahead, Sterling has sold off.

Financial markets are pricing this event risk on a scale similar to the fallout from the Lehman Brothers collapse.

Brexit enquiries

You often talk about risk management. What is a forward contract, and can this help?

Risk management has been a key consideration for many of our clients. Private clients are more extreme, tending either to have completely taken care of business by now, or leaving themselves open to see what happens. We have more clients take the conservative approach than we have ‘wild punters’, but we do still have a fair few crossing their fingers for the result to add to their forthcoming currency transfers!

On the whole, our business clients have been more prudent, adopting a risk management approach and hedging much of their short/medium term exposures. Discussions have tended to conclude with the client adopting anything from a 50%-75% hedge, locking a forward rate in now to cover future invoices. Typical behavior covers forecast exposures for the next 3-6mth as the general assumption is that the volatility and associated market risk should have calmed down that far after the result.

It is perfectly natural for Payment Providers to alter their margin requirements over this period – where the standard forward deposit might have been 5% in normal conditions, a 10% deposit is commonplace at the moment.

What should I be asking my Personal Currency Concierge?

Most are asking if we have a crystal ball!! Whilst we can’t provide that level of clarity, we have covered our price feeds with price alerts, to trigger for different clients at different levels. Keeping client’s informed and aware of the underlying market movement provides a great deal of comfort.

Are the trading hours on CurrencyTransfer.com going to remain the same over the coming days?

Our hours remain unchanged. The platform will be operational throughout, but some of the Partners may limit their exposure until the expected volatility calms down. This may mean transaction limits, or we may find that some opt to remove the prices they offer online.

Brexit effects on Fintech

What does the future of FinTech (Financial Technology) look like if we Brexit?

The main point here is any answer is entirely hypothetical at this point. The element of the unknown has become a big contributing factor to the disillusionment of many voters getting sick politicians jumping on the bandwagon of ‘Project Fear’ when discussing the unknown elements of a post-referendum world.

Immediately, there will be no change. Naturally, plans need to be laid and a road-map would need to be decided on.

Specifically for the FinTech sector, would a Brexit damage the reputation of London as Europe’s FinTech capital? From a regulatory perspective, many companies have their HQ in the UK, with the global reputation for regulatory excellence. Would this continue post EU, or could this represent a huge setback for UK FinTechs?

Currently, UK-regulated firms have the ability to ‘passport’ their regulatory status across the EU. Similar to how the UK would need to establish separate trade agreements from the outside, it is perfectly possible that many UK regulated firms would be required to physically locate to other countries, and become locally regulated, just to operate within a similar regulatory jurisdiction that they currently enjoy from the UK in the EU. Equally, that may also require European FinTech companies to establish a physical presence in the UK in order to serve the local market.

Close to home for CurrencyTransfer.com, would the cost of international payments increase? SEPA did reach the UK, but would that survive a Brexit?

Daniel Abrahams, CEO of CurrencyTransfer.com, the world’s first online marketplace matching businesses with the most competitive international payment quotes. Follow Daniel on Twitter and Google+